Market Roundup on Hops

A global supplier of hop products and services, Barth-Haas Group, through its offices in Germany, the US, the UK, Australia and China, has recently released The Barth Report – Hops 2008/2009 that provides key market data and analysis of the hop and brewing industries. Here is a roundup on the markets in Europe and China.

Humulus lupulus is a twining vine that is characterized by lobed leaves and green flowers (known as hops) arranged in cone-like spikes. Hops produce bitter aromatic oil that is used in the brewing industry to prevent bacterial action and add the characteristic bitter taste to beer.

World economic situation The world’s gross domestic product (GDP) fell to 2.2% in 2008 from 3.7% the previous year. In the final quarter of 2008, growth was negative in most national economies – GDP weakened significantly year on year in Asia, Latin America and Africa – as growth in Europe remained at below 1%.

The monetary policy led by Alan Greenspan, chairman of the Federal Reserve from 1983 to 2003, and the lack of state supervision on the financial sector are seen as the main reasons for creating the preconditions for the events affecting the world economy since 2007.

The collapse of the international financial system, from the sub-prime crisis in 2007 to the insolvency of the US bank Lehman Brothers on September 15 last year had affected the economy and forced governments around the world to put together rescue programs.

The difficult economic situation has also led to lower commodity prices. As a result of falling demand, the price for a barrel of crude oil (Brent) for example fell from $144.95 in the summer of 2008 to a five-year low of $34.24 by the end of the year. However, by May 2009 it had bounced back to more than $60.00. A similar decline in prices for other commodities was also observed around the world.

Hop production in Europe

due to the high volume of alpha acids produced in Germany. The hop supply crisis that had affected the brewing industry since crop year 2006 came to an end as the overheated market settled down. The price boom that had persisted since the summer of 2006 due to the supply shortage in the hop market ended in January 2009. There was however an unusually short duration of the spot market in Germany, which was possibly due to the growing world economic crisis.

In view of the high spot prices, particularly for high-alpha varieties, which reached a peak of 10.50 Euros/kg in Germany, trading companies swiftly abandoned their spot purchasing activities to prevent holding large and expensive stocks at the end of the marketing campaign.

While the hop traders’ were nervous and uncertain about the global economic developments and the possible adverse effects on the brewing industry, growers were optimistic about favorable prices in the market.

• Germany

Market expectations in many Eastern European hop-growing regions have led to a misjudgment of the marketing opportunities where, particularly growers in the Hallertau region, Germany, profi ted from. Many producers in Eastern Europe refused to deliver orders. They demanded improvement to existing contracts and did not consider offering their hops to the spot market. German growers then took advantage of the resulting gap in the market to sell their hops.

This led to a splendid year for German growers. Record yields in 2008, high open market prices and forward contract rates left the Hallertau region in a strong position, while warehouses of traders and growers in the Eastern European hop regions held large stocks of unsold produce.

• The brewing industry

After crop year 2007 the brewing industry reacted to what seemed to be a lasting hop shortage and to the high prices in recent years by reducing their hopping rates and extensively adapting their recipes to more economical hop products. The combined effect on the market due to the following was sobering for the hop industry:

1. The global economic crisis, with reduced beer consumption,

2. Acreage expansion that is secured by legally binding contracts with the brewing industry, and

3. Hop-saving measures carried out by the brewing industry.

Table 1. The global market in crop year 2008 was marked by extremes.

Hop production in China

About 22 hop farms remained after four farms in the Yumen area in Gansu merged. In Xinjiang, 37 farms are involved in hop growing. With a total of 59 hop farms, China has an average area of 96 ha per farm that cultivates hops in 2008, compared with 66 ha in 2007.

The high income the farms received from hops sales in crop year 2007 has led to a greater expansion in acreage in 2008. The increase in the Xinjiang growing region was 73%, with the greatest changes in the main variety Tsingdao flower (+130%) and Kirin flower (+145%). Acreage increased slightly in the Gansu growing region (see Table 2).

Table 2. China's hop production from 2007 to 2008.

The growing conditions were unfavorable in both growing regions due to the generally hot and dry weather. Crop yield and the quality of the hops were also impaired by frequent pest infestation and strong winds.

Although the Tsingdao flower variety achieved a better result than in 2007, with an average alpha content of 5.7%, it remained below the long-term average. In comparison with the previous year, there was a 16% increase in alpha acid yield.

• Market situation

China's beer output fell short of expectations as breweries greatly reduced the already low hopping rates, which significantly lowered the quantity of hops required. At the same time, the hops planted in 2006 and 2007 came into full bearing.

In September 2008, under intense purchasing competition, hop traders bought the high-quality hops of the main variety Tsingdao flower that was subject to purchase agreements at prices of 55-60 CNY ($8.05-$8.79) per kg.

Although purchase agreements existed with the breweries, they were largely without fixed prices. In March 2009, some purchasers were prepared to settle for 40-45 CNY (4.20 to 4.75 EUR) per kg for the hops, at signifi cantly lower prices than the traders had paid, resulting in falling prices for the remaining stocks. It was estimated in April 2009 that 3,500 tons of hops, mostly consisting of lots with low alpha acid contents, remained unsold in the two regions.

In order to protect themselves from a substantial downward price trend, some growers in Xinjiang planted other crops in their hop yards for crop year 2009, which will result in a lower hop yield. The acreage in Xinjiang in 2009 is likely to be 15-20% smaller than in 2008, based on normal cultivation levels. In the Gansu growing region, a slight increase is to be expected.

Purchase agreements with farmers for hops from the 2009 crop are likely to account for approximately 75% of the expected harvest yield, as in the previous year. China’s forward contract market however exists in the form of purchase agreements containing corresponding variety and quality defi nitions without price specifications.

If beer production in 2009 does not create a demand for a significantly higher hop supply, it is likely that, as for the 2008 crop, breweries will not fulfill all volume contracts made, resulting in more hard times ahead.

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